Chapter 23 - BSC - Overview PDF

# Chapter 23. Balanced Scorecard - Overview ## Chapter 23. Balanced Scorecard - Overview This chapter introduces the concept of the balanced scorecard in performance measurement and how it relates to an organization's strategic mapping. ### Lessons - **Lesson 1:** Introduction to Strategic Mappi...

# Chapter 23. Balanced Scorecard - Overview ## Chapter 23. Balanced Scorecard - Overview This chapter introduces the concept of the balanced scorecard in performance measurement and how it relates to an organization's strategic mapping. ### Lessons - **Lesson 1:** Introduction to Strategic Mapping, the BSC and Executive Dashboards - **Lesson 2:** Balanced Scorecard - Overview - Summary Problem ## Balanced Scorecard - Overview ### Balanced scorecard perspective: | Perspective | Key aspects | | ------------------ | -------------------------------------------------------------------------------------------------------------- | | Learning and growth | - Spend on employee skills; increase employee competence and morale | | Internal business processes | - Improve process quality; lower amounts of rework | | **Financial** | - Lower costs and higher revenue; higher return on capital employed | | Customers | - On-time delivery; greater customer satisfaction | ## Lesson 1: Introduction to Strategic Mapping, the BSC and Executive Dashboards ### Competencies: - 3.1.1 Evaluates management information requirements - 3.1.2 Documents and assesses business processes, systems, and data requirements, and recommends improvements to meet information needs - 3.6.1 Evaluates performance using accepted frameworks - 3.6.3 Evaluates root causes of performance issues ### Learning Outcomes: - Define strategic mapping and strategy maps. - Describe the BSC. - Differentiate between the four BSC perspectives. - Describe advantages and disadvantages of the BSC. - Discuss strategic mapping is related to the BSC. - Identity the impact of employees on the BSC. - Define executive dashboards. ## 23.1 Introduction to strategic mapping and the balanced scorecard There are various management tools that can be used to achieve organizational performance, several of which were introduced in the chapter on performance measures. This chapter provides an overview of strategic mapping and the balanced scorecard (BSC). **Strategic mapping** is a visualization process designed to communicate and validate a strategy. The map depicts the strategy and unfolds like a story; it translates a strategy into action. The BSC is a performance measurement and management system that helps management measure the success of the chosen strategy. It provides expectations to employees as to their role as agents of the organization and evaluates success or failure in this capacity by providing a cross-section of indicators from different perspectives. The process to create the BSC is as follows: 1. Develop the organization's strategy through a process such as strategic planning. 2. Map the strategy using the strategic mapping process. 3. Build the BSC based on the strategy map. ## 23.2 Strategic mapping A **strategy map** is a visual aid that brings the strategy to life in a generalized but highly integrated manner. Every organization, regardless of its size or sector, must meet customer requirements and financial obligations. In turn, customer and financial expectations can only be met with the right people, the right technologies, and the right business processes. The strategy map incorporates these two outcome perspectives (financial and customer expectations) with the two input perspectives (people/technologies and business processes) into a single visual representation. This allows organizations to validate and communicate a strategy and translate it into concrete actions. A generic strategy map is shown in a CPA Management Accounting Guideline. The following illustrates this: ### Generic Strategy Mapping: | | | | | | | -------------------- | --------------- | ------------------------------- | ------------------------------- | ---------------------------------- | | **FINANCIAL** | **Revenue growth strategy** | **Productivity strategy** | **Asset utilization** | **WHAT WE PLAN TO ACCOMPLISH** | | **CUSTOMER** | **Add/retain high-value customers** | **Increase revenue** | **Reduce cost per customer** | **HOW WE PLAN TO ACCOMPLISH** | | **INTERNAL** | | **Internal Operations excellence** | **Effective governance & control** | | | **LEARNING AND GROWTH** | | | **Perception; public relations** | | | | **Customer management leadership** | **Innovation & commercialization on supermacy** | | | | | **(1) Human capital (staff competencies)** | **(2) Information capital (technology infrastructure)** | **(3) Organization capital (climate for action)** | | Understanding how to effectively map a strategy provides value to managers in a number of ways: - It enables managers to effectively support the strategic planning process through the ability to facilitate the strategy mapping exercise. - It provides a frame of reference for developing the strategic plan. - It tests the validity of the chosen strategy through the examination of cause and effect. - It aids in the refinement of strategic performance goals and measures, in particular as they relate to the BSC. - It highlights the key strategic focus areas for all employees to see. ## 23.3 BSC overview The BSC was originally developed by Dr. Robert Kaplan and Dr. David Norton as a framework for measuring overall organizational performance with a balanced perspective. The BSC was developed so organizations would focus on various aspects, or perspectives, of the business in order to evaluate the success of their chosen strategy. Prior to this, organizations mainly relied on financial measures to evaluate success. Kaplan and Norton identified the weakness in this approach, namely that it looked at only one aspect of the organization, and the BSC addressed this by adding non-financial strategy measures to give a broader perspective on the organization, such as those related to customers, internal business processes, and learning and development. A key component of the BSC is that it doesn't aim to measure everything in the organization, just a limited number of data points across the organization. This provides focus on the key strategic goals, both financial and non-financial, and reduces ambiguity, mixed signals, and overreliance on a subset of important yet incomplete indicators. In addition, the BSC enables both management and employees to better assess performance in all key facets of the organization and take action where strategic objectives are at risk. A performance management system is one that provides direction to employees so that they can determine which actions to take to best meet the goals of the organization. The BSC provides specific direction by providing a balanced set of specific measures and targets applicable across departments. Although there is no required format, the BSC is often structured into four perspectives 1. **Financial** (how the organization is seen by its owners and investors) - This perspective is grounded in the need to provide adequate financial returns to the organization's shareholders or resources to meet a not-for-profit organization's mandate. In profit-oriented businesses, the returns are usually in the form of dividends for shareholders. In not-for-profit organizations, the budget normally plans for break-even operations. However, if actual results produce a surplus, these financial resources can be used to further the mandate. The financial perspective uses the more traditional measures of financial performance, such as: - Returns on assets - Excess of revenues over expenses - Equity - Capital employed - Operating income growth 2. **Customer** (how the organization is seen by customers and the market) - This perspective focuses on the organization's targeted customers and measures the organization's success in generating and maintaining customers. Measurements of this perspective include: - Customer satisfaction - Percentage growth in new customers - Market share growth Financial information is frequently classified as a lagging indicator, meaning the information represents what has happened in the past. As opposed to the lagging indicators of financial performance, customer measures are considered to be leading indicators that give insight into future performance. 3. **Internal Business Process** (what the organization must excel at executing) - This perspective focuses on the organization's operational processes and provides information on how well the organization delivers value to its customers, shareholders, and stakeholders. This focuses on the organization's core competencies and the areas where needs to excel in order to provide value. Measures of performance for this perspective might include: - Service delivery time - Number of manufacturing defects - Variance analysis of standard costs 4. **Learning and growth** (generally, employee competencies, technology, and corporate culture - in other words, skills and capabilities development) - This perspective is concerned with the ability of the organization's people to change and improve. Knowledge-based economies put a premium on intellectual capital and continuous learning. This intellectual capital can be a major competitive advantage. Some measures in this area might include: - Hours of training - Number of mentors - Number of successful innovations The Performance Measures chapter provides an overview of goals and performance measures that may be used as part of the BSC. ## 23.3a Let's look at an example The following are BSC measures: - Number of high-value customers - Total costs or quality - Number and frequency of complaints - Profit increase year over year - Number of cross-functional teams - Time to resolve customer concerns or complaints Each measure can be categorized into the most common BSC perspectives, as follows: | Measure | BSC perspective | | ------------------------------------- | ------------------------ | | Number of high-value customers | Customer perspective | | Total costs or quality | Internal business process perspective | | Number and frequency of complaints | Internal business process perspective | | Profit increase year over year | Financial perspective | | Number of cross-functional teams | Learning and growth | | Time to resolve customer concerns or complaints | Customer perspective | ## 23.3.1 Characteristics of a BSC Although discussed separately above, the perspectives of the BSC have an interrelated cause-and-effect flow. For example, management can use the BSC to justify hard-to-explain budget expenditures on developing employee skills. the flow can be illustrated as in the following image, where additional budget spending on employee skills has benefits for business processes, increasing customer satisfaction and ultimately generating a higher return on capital employed. This concept is illustrated in the following diagram: **Relationship between BSC perspectives:** | | Key aspects | | ---------- | ----------------------------------------------------------------------------------------- | | **Learning & growth** | - Spend on employee skills; increase employee competence and morale | | **Internal Business Processes** | - Improve Process Quality; lower amounts of rework | | **Financial** | - Lower costs and higher revenue; higher return on capital employed | | **Customers** | - On-time delivery; Greater customer satisfaction | The BSC should be created and organized to suit the strategic dynamics of each particular organization. There is not a one-size-fits-all approach, as the BSC must be tailored to meet the needs of each organization. The BSC provides results on three levels: - An organization will be able to assess whether it achieved its strategy from an overall standpoint. - Performance within each perspective can be analyzed. - Each goal within the different perspectives can be assessed individually. Recall that to create an assessment for the goals, for each goal identified the organization will need to clearly state what the measure is for that specific goal. After the measure has been determined, the organization will draft a target. The target can be based on external benchmarks or internal standards. Performance in each of the measures is then summed to create an overall score used for assessment of total performance of the individual, department, or organization. In addition to measuring the success of the strategy execution, the BSC can be used to determine bonuses and other performance-related rewards. The three-level approach allows the organization to assess and interpret performance at a variety of levels, and puts a spotlight on results in areas of key concern. In other words, after each fiscal period, the management accountant compiles and analyzes BSC results to provide management with insightful performance measurement indicators that can be interpreted and point to what areas are running smoothly, and which merit further investigation, analysis, and corrective action. ## 23.3.2 Goals, measures, and targets It is important to understand the differences between the terms "goal," "measure," and "target," and how each is used in the development of the BSC. | Term | Description | | ---------- | --------------------------------------------------------------------------------------------------------------------------------------------- | | **Goal** | What the organization strives to achieve | | **Measure** | What the organization tracks to determine if it has met its goal | | **Target** | How the organization wants to support the organization's strategic plan. This is the target the organization is aiming to reach to support the goal. | Consider an audit firm that has a goal of retaining its clients. To support this goal, the firm plans to measure its customer satisfaction through the use of a client satisfaction questionnaire on every engagement. The firm currently has 72% client satisfaction, and has made a target of having an average of 80% client satisfaction in the next year. ## 23.3b Let's look at an example Determine whether each of the following is a goal, a measure, or a target: - Return on net assets - Provide excellent customer service before and after sales - Lead times from order to delivery of a product of seven days or less - Revenue per salesperson of $450,000 - Storage and delivery cost - Retain key staff | Item | Goal, Measure, or Target | Description | | ---------------------------------------------- | ------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | | Return on net assets | Measure | This is a measurement of how the organization uses its assets to generate profit. It can be tracked to determine if the organization has been successful in achieving the goal. | | Provide excellent customer service before and after sales | Goal | The organization's strategy is to provide customer service before and after sales. This is what the organization is hoping to achieve. | | Lead times from order to delivery of a product or seven days or less | Target | This is a specific target that, if met, would support the organization’s strategy. If the organization can achieve this, it will be working towards successfully implementing it. | | Revenue per salesperson of $450,000 | Target | This is what the organization aims to accomplish. It is the target for their revenue per salesperson. | | Storage and delivery costs | Measure | This is a measurement that can be tracked to determine if a goal is being met. | | Retain key staff | Goal | This is the organization's overall goal, to retain its key staff. This is what the company hopes to achieve. | ## 23.3.3 Advantages and disadvantages of the BSC When utilized, the BSC can be a powerful tool to help focus an organization's strategy. The following are a few of the main advantages for organizations employing the BSC as a performance measurement tool: - Helps align strategy with operational activities. - Facilitates strategic discussions at the senior management and board level by illustrating the organization's goals and objectives in a holistic view on a single page. - Provides a balanced view of performance, including both financial and non-financial measures, and leading and lagging indicators (normally about four to seven key measures for each BSC perspective). - Limits the number of measures to only those most critical to attain success. - Considers all time horizons, including past, medium-term future, and long-term future. - Communicates the strategy across the organization by clearly identifying measurable targets to attain the strategy. - Helps management attain organizational goals. For example, a strategy to improve product quality might result in the development of processes to support quality. The price could then be raised to cover additional costs and provide a margin. Customers would be more satisfied with the resulting product, leading to more sales and improved financial results. There are also some disadvantages of the BSC, including the following: - It has a high cost of implementation, and its results are good only if the organization takes the time to set out well-developed objectives and measures. - It must be developed at the organization level, and those developing it must be willing to make trade-offs that result in an overall benefit to the organization. - While it provides a balanced view, the BSC is often an internal document not available to stakeholders. If it is given to stakeholders, it requires additional and detailed accounting information for stakeholders to assess performance and make resource-allocation decisions. - The organization's metrics must be relevant to the situation and strategy. - It can be difficult to quantify some measures, such as interview or survey results, though if done properly these can provide key insights into the organization. - Managers tend to focus only on the goals they will be measured on, rather than overall organization success. If the BSC has gaps or isn't measuring the right things, it could result in the strategy failing. - If the additional effort placed on reporting under the BSC does not yield improved strategic management, it becomes a non-value-added activity and should be targeted for improvement or elimination. ## 23.3.4 BSC at the employee level The BSC usually starts at the organization level, so that the BSC represents the strategy of the entire organization. For many organizations, opportunities exist to create scorecards at lower levels of the organization (usually divisions, departments, or teams). In some cases, individual scorecards are built for key (or even all) employees. Any subsequent BSCs built should be derived from the main one. The benefits of creating these more focused BSCs should be weighed against the costs. For example, consider how a BSC for sales and marketing would be much more focused and relatable to that area, or whether a BSC for human resources would cater to that department’s mandate. The key is that the lower-level BSCs must be linked to the upper-level ones. ## 23.4 Executive dashboards In addition to using the BSC and strategic mapping to integrate financial analysis and other perspectives, management also may benefit from executive dashboards. On behalf of stakeholders, management undertakes many important actions that may expand market opportunities and increase stakeholder value. These activities may include research and development (R&D), staff training, marketing, and advertising. Some of these activities may be difficult to translate into traditional financial ratios, especially in the short term. Like the BSC and strategy maps, executive dashboards attempt to take a longer-term view by linking strategic objectives, operational activities, and corporate outcomes. The executive dashboard is a tool to visualize business functions and performance. There are numerous forms of dashboards (including those designed to look like an automobile control panel). These draw data from multiple sources and are a usual feature of enterprise resource planning systems (see the Strategic Supply Chain Management Overview chapter). Dashboards display specific management information in real time. This makes them different than the BSC and strategy maps. Dashboards can be customized to report on whatever activities management deems to be critical to organizational success. They can track trends, efficiency data, KPIs such as customer-related metrics, financial accounting information such as revenue by region or product, and a host of industry-specific indicators. Having access to this information allows executive management to measure and act on any deviations from expectations quickly, which ensures the organization is continuing to work toward achieving its strategic goals. ## Lesson 2: Balanced Scorecard - Overview - Summary Problem ### Competencies: - 3.1.1 Evaluates management information requirements - 3.1.2 Documents and assesses business processes, systems, and data requirements, and recommends improvements to meet information needs - 3.6.1 Evaluates performance using accepted frameworks - 3.6.3 Evaluates root causes of performance issues ### Learning Outcome: - Discuss the use of strategic mapping, the BSC, and executive dashboards in performance measurement. ### Summary Problem a) Discuss strategy mapping process and how it may bring value to an organization. b) Describe the four perspectives that are commonly considered in the balanced scorecard. c) Differentiate between a goal, measure, and target, providing an example of each. d) Provide an example of a performance measure for each perspective that could be used in the balanced scorecard for an accounting firm. e) Discuss how executive dashboards can help management monitor performance within an organization. ## Solution a) The strategic mapping process involves creating a visual aid that communicates and validates the strategy of an organization. It shows integration between customer-based, financial, and internal goals of an organization. The strategy map also translates the strategic objectives of the organization into action, because it shows how the organization might meets its goals through this integration. The strategic mapping process can bring value to an organization because, through the process of visually mapping strategies, it can ensure the strategies are valid through the examination of cause and effect. The strategy map itself highlights key strategic focus areas, which enables all employees to see and participate in the organization meeting its goals. Strategic mapping also can support and facilitate the creation of a strategic plan because it provides a framework that can be followed by managers. b) The balanced scorecard contains the following perspectives: - **Financial** - This perspective considers how for-profit organizations provide profit for investors and how not-for-profit organizations fulfill its organization’s mandate. - **Customer** - This considers the success of the organization as it relates to obtaining and maintaining its customers. - **Internal Business Process** - The focus is on the processes within the organization that are used to fulfill its customer demand and provide value. - **Learning and growth** - This perspective considers employee competency, technology, and culture of an organization, and whether the organization can grow and change. c) A goal is a plan for what the organization would like to achieve. Goals are usually determined through the strategic planning process. For example, a manufacturing company organization may set an internal business process goal of reducing its abnormal spoilage. Measures are tracked to determine if the organization is meeting its goals. For example, an organization may track its abnormal spoilage units as a percentage of total units manufactured. Targets are ways the organization determines whether it has met its goals. For example, the target for abnormally spoiled units as a percentage of total units manufactured may be 0.01%. d) | BSC Perspective | Examples | | ------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | | Financial | Profit and revenue growth of 5% per retained account; overall revenue growth of 10%; total costs as a percentage of revenue remain the same year over year | | Internal business processes | Days from engagement start to completion do not exceed planned time; errors per engagement are reduced from the previous year | | Customer | Client satisfaction measured by the number of years a client has been with the firm; market share per type of engagement | | Learning and growth | Training hours per accountant; information technology updates implemented; percentage of high performers retained | e) Executive dashboards are a monitoring tool that allow executive management to visually oversee the organization's performance through key performance measures. The performance measures selected should be related to the strategic goals of the organization so that by monitoring the dashboard, executive management can ensure that the organization is moving toward achieving its goals. Dashboards often contain information in real time, which differs from the BSC, and can allow management to respond quickly to performance issues. Dashboards can also be customized and changed over time as key performance measures change. ## Practice Problem 1 **Happy Story Gardens (Happy)** is a public company operating storybook-themed gardens across Western Canada for young children and their families. Happy strives to provide an experience that creates lifelong memories at safe, clean, family-friendly environments, at reasonable prices. Happy sells single admissions that a customer can convert to an annual pass while at the park if they enjoy their visit. Based on past customer research, Happy’s customers who purchase annual passes are most interested in new displays. As part of its operations, Happy has an acre-sized learning garden at each of its locations, used for educational and community outreach programs. Staff volunteer their time to these programs by caring for the plants and teaching children and adults about the importance of food security (access to sufficient, safe, and nutritious food). Happy’s board of directors is considering implementing a balanced scorecard (BSC) so that it can better focus on the organization’s strategy. **Required:** a) Briefly describe the process Happy should following to create a BSC. b) Explain how the general managers in each location might find value in Happy’s strategy map. c) Describe an example of a measure that Happy could use for each of the four common BSC perspectives. ## Solution to Practice Problem 1 a) To create a BSC, Happy must follow these steps: 1. Using a strategic planning process, the board must develop a strategy for Happy. 2. The strategy is then organized on a strategy map - a visual representation of Happy’s strategy. In this strategy map, customer requirements and financial obligations are linked to internal business processes and learning and growth goals. The strategy map shows the linkage between the components of Happy’s strategy and illustrates the actions that will help Happy meet its goals. 3. The BSC is then created based on Happy’s strategy map. This involves setting goals, measures, and targets in four different perspectives: financial, customer, internal business process, and learning and growth. b) When Happy prepares a strategy map, the general managers will have access to a visual representation of the organization’s objectives.. Through reviewing the map, the managers can validate the strategy of the organization and ensure that they understand what Happy is trying to accomplish. The general managers can take the goals from the strategic map and apply them to their park location. The managers can then provide feedback to the board about whether the goals are reasonable and can be implemented at the parks. c) - **Financial** - Happy is a public company, so measures of profitability, such as earnings per share, profit or loss, and profit margin are likely important to the board and shareholders. - The organization is concerned with establishing “reasonable prices” as part of its values; therefore, admission fees relative to competitors may be a relevant measure. - **Customer** - Because customer satisfaction is very important, Happy should be performing customer satisfaction surveys. Specifically, Happy is concerned about the safety, cleanliness, and family-friendliness of its parks, so there should be questions on the survey about these aspects of Happy’s operations. (Note: although targets were not requested, to make this measure quantifiable, the board could set a specific target for the number of positive responses on the survey, such as 90%.) - The organization could also calculate the number of annual passes sold throughout a particular time period, (as compared with previous benchmarks for that time of year) to determine whether customers enjoyed these new experiences and want to return. - **Internal business process** - To entice customers to purchase annual passes, Happy could set a measure related to the number of new displays. This would also help to create lifelong memories for Happy’s customers. Advertising/marketing would play a key role in promoting these new displays. - Because providing clean environments is important to Happy, the number of maintenance employees per park or the total number of litter pickup hours could be tracked. - **Learning and growth** - Happy operates educational and community outreach activities in each of its learning gardens, so a measure of the percentage of employees who volunteer in these programs would be useful. - Staff training hours per employee would also help to ensure that employees are properly trained to support Happy’s values. These are examples of measures that Happy could use; alternate responses may be acceptable. Reasonable responses will identify relevant quantifiable performance measures and clearly link these to Happy’s values (that is, providing safe, clean, friendly family environments at reasonable prices). ## Practice Problem 2 **Zann Co. manufactures plastic personal fans and sells them through online marketplaces. It plans to grow by licensing images of popular television characters to use on its products with a “collect them all” positioning, manufacturing the fans at a low cost, and delivering them to customers in a timely manner. There are several competitors on the market who produce similar fans. Zann’s board of directors believes that continuously improving the company’s manufacturing processes and having satisfied employees are critical to implementing its strategy.** **Required:** a) Assuming the perspectives of financial, customer, internal business processes, and learning and growth, provide a goal, measure, and target for Zann. b) Describe how Zann’s BSC could be implemented at the employee level. ## Solution to Practice Problem 2 a) - **Financial** - Goal: Lower production costs - Measure: Variable cost per unit - Target: Decrease variable cost per unit by 5% from current costs - Goal: Increase profitability - Measure: Profit margin - Target: 8% or greater - **Customer** - Goal: Provide fans that visually appeal to customers, by including popular television characters. - Measure: Customer satisfaction survey results. - Target: Score of at least 8 out of 10 on the customer satisfaction survey question about the appeal of products. - Goal: Encourage customers to make multiple purchases. - Measure: The number of unique character fans a customer purchases specific to one TV series licence. - Target: Customers buy at least three character fans per TV series licence. - **Internal business processes** - Goal: Reduce manufacturing time. - Measure: Lead time from customer order to delivery of goods. - Target: Lead time of seven days or less. - Goal: Deliver fans to customers in a timely manner. - Measure: On-time delivery percentage - Target: 95% or greater - **Learning and growth** - Goal: Retain key employees. - Measure: Employee turnover percentage. - Target: 10% or less per year. - Goal: Satisfied employees that view Zann as a top employer. - Measure: Results of an annual employee satisfaction survey. - Target: Employee satisfaction of 80% or higher More than one example per perspective has been provided. Responses will vary. A reasonable goal, measure, and target are linked to Zann’s strategy of appealing to customers, low costs, timely delivery through improving manufacturing processes, and satisfying employees. b) Although the BSC starts at an organizational level, the concept can be applied to the divisional level and the employee level. Using Zann’s organizational BSC as a guide, scorecards can be developed for key employees, such as managers and executives. The goals, measures, and targets for employees must support Zann’s overall organizational goals so that by tracking the employees' BSCs, it is possible to monitor the organization’s goals. For example, Zann has an organizational goal of retaining key employees, each departmental manager could also have a personal goal of retaining employees in their departments. This would help to support the overall organizational goal. Other suggestions are acceptable, when supported.